Understanding the Common Ownership Test for Medicare Related-Party Transactions

How Medicare Determines “Related” Status

One of the primary ways Medicare determines whether two organizations are “related parties” is through the common ownership test. When common ownership exists, transactions between the entities may be subject to the related-party cost principles of 42 CFR § 413.17, which generally require costs to be reported at the supplier’s cost rather than the amount charged.

What Is Common Ownership?

Common ownership exists when an individual or group of individuals possesses ownership interests in both the healthcare provider and the organization furnishing goods, services, facilities, or supplies to that provider.

In other words, if the same people have meaningful ownership stakes in both companies, Medicare may consider the entities related even if they are separate legal organizations.

Common Ownership Examples

Example 1: Management Company

Smith Nursing Center is owned 100% by John Smith.
Smith Management Services is owned 100% by John Smith.
The management company charges the nursing home $500,000 annually.

Because the same individual owns both entities, common ownership clearly exists. The nursing home may be required to report the management costs based on the management company’s actual costs rather than the invoiced amount.

Example 2: Shared Ownership

Owner	Nursing Home	Therapy Company
Susan	50%	50%
Robert	50%	50%

Even though the entities are separate corporations, the ownership group is identical. Medicare would generally view these entities as commonly owned.

Example 3: Family Ownership

Owner	Nursing Home	Pharmacy
Father	100%	0%
Daughter	0%	100%

Although the entities do not have common ownership based solely on their ownership interests, the family relationship should not be disregarded. Providers should evaluate whether the relationship, together with other facts and circumstances, gives either individual the ability to directly or indirectly influence or direct the actions or policies of both organizations. If such control exists, the entities may warrant further analysis under Medicare’s related-party provisions.

Does Medicare Require Majority Ownership?

Not necessarily.

Unlike some tax and accounting rules that use a strict 50% or 51% threshold, Medicare evaluates whether ownership is sufficient to allow an individual or group to significantly influence both organizations.

Factors considered include:

Voting interests
Partnership interests
Membership interests in LLCs
Stock ownership
Ability to appoint directors or officers
Contractual rights that allow influence over operations

Common Ownership Red Flags

When reviewing related-party disclosures, providers should evaluate:

Shared ownership groups
Overlapping LLC members
Common shareholders
Shared real estate ownership
Holding company structures
Ownership by spouses or immediate family members
Parent and subsidiary organizations
Organizations created solely to serve affiliated providers

Documentation Providers Should Maintain

To support their related-party analysis, providers should maintain:

Corporate organizational charts
Ownership schedules
Operating agreements
Stock ledgers
Partnership agreements
Annual disclosure statements
Related-party questionnaires completed by owners and executives

Practical Example in Nursing Facilities

A common arrangement in the nursing home industry involves:

The nursing facility operating company.
A related real estate entity that owns the building.
A related management company.
A related therapy or pharmacy company.

Although each organization may be legally separate, Medicare considers them related if common ownership or control exists. When a related-party relationship exists, costs such as rent, management fees, therapy costs, and other charges are subject to Medicare’s related-party cost principles and must be reported based on the related organization’s allowable costs rather than the amount charged.

When a Related Party May Be Treated as Unrelated: The “Significant Business” Exception

Common ownership doesn’t automatically lock a provider into related-party cost reporting forever. Under 42 CFR § 413.17(b), a related organization may still be treated as unrelated meaning transactions can be reported at the billed amount rather than the supplier’s actual cost. If the provider can show the supplier is a bona fide separate organization that transacts a substantial, demonstrable volume of business with unrelated parties, and that its charges to the related provider are comparable to what it charges unrelated customers for the same services or supplies.

This exception matters most for entities like therapy companies, pharmacies, or management companies that are commonly owned with a facility but also operate at arm’s length with unaffiliated providers. That said, the exception is narrowly applied and closely scrutinized on audit — the burden falls on the provider to document revenue and volume breakdowns showing unrelated-party business, evidence that pricing is consistent across related and unrelated customers, and the supplier’s operational independence. Common ownership creates a presumption of relatedness, but with the right documentation, that presumption can be rebutted.

Key Takeaway

The common ownership test focuses on who ultimately owns the provider and the organization supplying it with goods, services, facilities, or supplies. If the same persons or entities hold sufficient ownership interests in both organizations, Medicare may require the provider to disclose the relationship and report costs based on the supplier’s actual cost rather than the amount charged. That said, common ownership isn’t necessarily the final word — where a related supplier can demonstrate substantial, arm’s-length business with unrelated parties and comparable pricing, the relationship may qualify for treatment as unrelated. Either way, proper analysis, documentation, and disclosure are essential to avoid audit findings, reimbursement adjustments, and compliance risks.